Churn will be the challenge as broadband competition strengthens

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The good news is that 48 million more Western European households will get broadband over the next six years, says Pete Nuthall. The bad news for ISPs is that churn will rise as customers look for better deals

Broadband household penetration in 2007 and annual growth varied widely across Europe

Residential broadband penetration in Western Europe is set to rise by 48 million households over the next six years, from 44% at the end of 2007 to 71% by the end of 2013, according to a new study by Forrester Research. Over the same period, Forrester projects the continual marginalisation of dial-up services, which will account for only 2% of all online connections.
The impact of emerging technologies such as WiMax and fibre to the home will be limited to 8% of all internet connections.
The addition of 48 million new broadband connections may seem a healthy opportunity for broadband suppliers, but our forecast reveals that the key challenge for ISPs will be managing customer churn.
In 2008, we estimate the level of churn to be 23% across Western Europe, and this will peak in 2012 at 31%.
Most at risk are incumbents such as BT, France Telecom, Deutsche Telekom and KPN, due to regulatory action that force them to open up their networks to competition through local loop unbundling.
Incumbents will need to reassess existing retention strategies in the light of increased price-based competition from alternative ISPs.
Broadband has been placed politically at the root of economic and social development. It greatly enriches the online user experience, allows users to communicate with the wider world and extends online behaviour to advanced activities such as online shopping and social networking.
We have seen a strong correlation between broadband adoption and activities like online shopping.
However, the significance of broadband is not lost on politicians. The EU for example has highlighted its own broadband targets with its i2010 initiative. The aim of this is to bring high-speed broadband access to all Europeans with the hope to improve economic growth and employment.
Of course each member state has its own targets for broadband adoption. Greece for example — traditionally the market with the lowest broadband penetration in Europe — has implemented its Digital Strategy 2006-2013 plan to boost competition, lower prices, and catch up with the rest of Europe.

Market slowdown

There is still huge potential for growth in Western European residential broadband despite a slowdown in the majority of national markets.
In terms of who's hot and who's not, which European member states are leading the charge of residential broadband adoption today?
The Netherlands and Scandinavian countries continue to dominate Europe as they have done for several years. Ahead of the European average of 44% the Netherlands leads the pack with household broadband penetration rates as high as 75%, closely followed by Denmark with 73%.
Factors of success for these countries include strong competition, low prices, and high broadband speeds — offers of 20 megabits a second connections have become common in these mature markets.
Middle-of-the-road countries including Europe's big three follow. Germany, the UK and France, as well as Austria, Switzerland, Belgium and Luxembourg still haven't quite caught up with the leading countries.
The UK, Switzerland and Belgium have household penetration levels of 56%, 55% and 55% respectively — still some 20 percentage points behind the Dutch.
Germany, Austria and France show an even wider gap, with penetration rates around the 40% mark, below the European average.
However, these markets will catch up. Local loop unbundling has fuelled competition, causing broadband prices to fall further which will push uptake. They saw annual growth rates of mostly 20-30% for 2007
The laggards are Greece, Ireland, Italy, Portugal and Spain, which trail the group.
Countries in this category generally had relatively low broadband household penetration coupled with high year-on-year growth in 2007.
Spain, Portugal and Italy will see broadband household penetration levels this year of 35%, 30% and 27% respectively, and will grow by 24-28% on last year. Greece brings up the rear, with just 17% broadband household penetration in 2007.

Lack of competition

Coverage issues and lack of competition still remain the key challenges for Greece and Ireland to overcome, while Italy, Portugal and Spain must concentrate their efforts to encourage its customers to transfer from dial-up to broadband.
Looking ahead, broadband will continue to grow. At a European level, broadband hasn't peaked yet. By the end of 2013, Forrester expects penetration to rise to 121 million households — or 71% of Western Europe's total.
That means 48 million new broadband household connections during this period.
By 2013, 85% of homes in the Netherlands and Denmark will have broadband connections. However the real growth opportunity will be in countries we have classified as laggards or middle-of-the-road countries, Germany, the UK and France. Germany will add more than 11 million broadband connections, while the UK and France will each add 8 million by the end of 2013. There is a significant growth opportunity for ISPs in those regions.
In contrast, Greece and Italy will reach 52% and 58% respectively. The irony for Italy is that the high penetration of 3G devices and take-up of mobile internet services will undermine the future growth of broadband households.

New technologies

New access technologies such as WiMax and fibre to the home remain in their infancy in terms of deployment. So how will these and other broadband access technologies develop over the next five years?
Our research reveals that DSL will continue to dominate the market as it continues to be the most cost-efficient technology. Even cable-based and fibre-based ISPs such as Virgin Media in the UK and FastWeb in Italy have adopted DSL through local loop unbundling to increase their customer bases quickly and economically.
Other technologies will grow but not as much as the hype suggests. WiMax will be mostly a complementary technology, deployed predominately in limited areas where DSL is either unavailable or economically unviable.
Despite the obvious speed benefits of FTTH for the end user, business models in all areas apart from greenfield sites will remain contentious.
Recent announcements from incumbent telecom operators have shown limited support of FTTH. Only France Telecom has committed to a wide scale deployment.
A more cautious approach has been adopted by the other incumbent providers. Their plans are limited to fibre to the kerb deployments, with the "last mile" supported through either DSL or passive optical network technology.

Managing churn

Our interactions with ISPs have revealed churn as one of their top three challenges in the next five years and this is for good reasons. In 2008, 18 million households will switch providers — 23% of the overall European base.
Looking at the 2008-13period, we will see more than 150 million cases of churn. This include includes savvy households that will churn more than once in this period due to dissatisfaction or to take advantage of better deals.
ISPs that respond by targeting these segments face a double-edged sword as these customers will likely be short term customers only, as they have already proved to be disloyal.
Interestingly, churn was identified to be a universal issue across countries we qualified as leaders, middle-of-the-road and laggards. Related concerns such as customer satisfaction were also prominent in our research with ISPs.
Tracking and improving measures have become increasingly important and already feature prominently in KPI dashboards, business goals and internal performance reviews

Retention, retention, retention

So it's a time of great change. The additional 48 million broadband connections over the next five years is great news, but sobering churn figures will offset this opportunity.
But there is hope for ISPs. Forrester can forecast that triple-play and quadruple-play adoption will slow the state of churn and help them get to grips with the problem.
The reason for this is this is customers are less likely to switch providers if they are provided with multiple services.
Most at risk from customer churn will be incumbent providers such as BT, France Telecom, Deutsche Telekom and KPN.
Regulators' LLU provisions will lead to regulatory action that forces them to open up their networks to competition. This gives alternative providers greater control over the provision and packaging of their broadband services.
This will subsequently bring the price of broadband services down, making it more affordable for a wider market.
Incumbent providers will be prepared for this price based competition. Their revised customer retention strategy will differentiate themselves with service and customer experience.
So in the end it will come down to the age old decision for consumers: cost or quality. GTB

Pete Nuthall is a research analyst at Forrester Research